XV

POST-WAR FINANCE

_November_, 1918

Taxation after the War--Mr. Hoare's Scheme described and analysed--The
Position of the Rentier--Estimates of the Post-War Debt--The
Compulsory Loan Proposal--What Advantages has it over a Levy on
Capital?--The Argument from Social Justice--Questions still to be
answered--The Choice between a Levy and Stiff Taxation--Are we still
a Creditor Nation?--Our Debt not a Hopeless Problem--Suggestions for
solving it.


Under this heading two very interesting articles were contributed to
the October issue of _Sperling's Journal_ by Mr Alfred Hoare and an
"Ex-M.P.," and the subject is clearly one to which, now that the end
of the war has been brought appreciably nearer by the feats of the
Allied armies, too much thought and discussion can hardly be given.
How are we going to face the problem that has been built up for us by
the bad finance of the war, the low proportion of its cost that has
been paid for out of taxation, and the consequent huge debt with
which--it is already over L7000 millions gross--the State will be
saddled? Mr. Hoare answered the question by proposing a scheme of
taxation of what he called Rente, by which he meant all forms of
"unearned income"--"rentals from freehold and leasehold property,
interest upon loans whether public or private, and dividends on joint
stock companies or sleeping partnerships." He added that in his
opinion earned income above a certain figure might reasonably be added
to this category on the ground that it has, in some instances, very
much the same characteristics as unearned; the income of a "successful
professional man or clown or jockey or opera star" being due to
peculiar qualities; "and it would be no great hardship if earned
income above, say, a thousand a year for a married couple, with an
additional three hundred for every child under twenty-five years of
age were regarded as unearned, and taxed accordingly." Income was
thus the basis of Mr Hoare's scheme. Rente he regards as an agency
regulating distribution, and requiring to be constantly checked. "It
is," he says, "an elementary principle of social health, and economic
prosperity that the share of the national wealth enjoyed by the
Rentier, by the owner, that is, of unearned income, should not be
excessive," Most people who can follow his admirable example and take
a detached and unbiassed view of questions which affect their pocket
so closely, will agree with him In this opinion. The Rentier lives on
the proceeds of work done in the past by him or by some other person;
and it is not good for our economic health that he should grow too
fat at the expense of those who are working now, lest the latter be
discouraged and work with less spirit.

At the same time we have to remember that the work done in the past by
the Rentier or those whom he represents, has given us the plant and
equipment (in the widest sense of the phrase) with which we are now
working. If, therefore, we penalise the Rentier too severely we shall
discourage his future creation; the present race of earners, if they
see that those who are living on past savings are shorn too close
will be deterred from saving, will put their surplus earnings into
extravagant spending instead of into plant and equipment, and the
economic future of the nation, and of the world, will be _pro tanto_
less hopeful. If once our fiscal system is going to propagate the
view--already so rampant among the happy-go-lucky citizens of this
unthrifty people--that the worst thing to do with money is to save it
there will be bad times ahead for our industry and commerce, which can
only get the capital that it needs if somebody saves it. Mr Hoare's
elaborate calculations led him to conclusions involving a tax of
11s. 6d. in the pound on unearned income. This figure is, I hope,
needlessly high. To arrive at it he assumed that peace might be
concluded towards the end of 1919, and that when peace conditions are
fully re-established--which will take, he thinks, three years, the
National Debt will amount to L10,000 millions, involving annual
interest of L500 millions, which, added to the total Rente of the
country in 1913 (which he made out to be L520 millions), will make a
total Rente in 1923 of L1020 millions. His view is that the burden of
the National Debt should be thrown by means of the income tax upon the
national Rente, not taxing it out of existence, but by such a scale of
taxation as would reduce the net Rente of the country to approximately
the level at which it stood before the war.

There is good reason to hope that Mr Hoare's figures will not be
reached. He took L10,000 millions merely as a round sum. Mr Bonar Law,
it will be remembered, worked out our net debt on March 31st next at
L6856 millions, taking credit for half the estimated amount of loans
to Allies as a good asset. If we prefer as sounder bookkeeping to
write off the whole of our loans to Allies for the time being and
to apply anything that we may hereafter receive on that account to
Sinking Fund, the debt, on the Chancellor's figures, will amount on
March 31st (if the war goes on till that date) to L7672 millions. Even
if the war went on for six months more it ought not to bring the debt
up to more than L9000 millions at the outside. It is quite true, as
Mr Hoare says, that the return to peace conditions will be a gradual
process, and that expenditure will not come back to a peace basis all
at once. Demobilisation and other matters which were left, by our
cheery Chancellor, out of the airy after-war balance-sheet that he so
light-heartedly constructed, may cost L1000 millions or more before
we have done with them. But against them we can set a string of
recoverable assets which, in the Chancellor's hands, footed up a total
of L1172 millions--balances in agents' hands, due debts (apart from
loans to Allies), land, securities, ships, buildings, stores In
Munitions Department, arrears of taxation, and so on. With his 11s.
6d. in the pound on unearned and 6s. in the pound on earned incomes,
Mr Hoare expects a revenue of L620 millions, "or enough to provide for
the interest of the debt with a 1 per cent. Sinking Fund, and
leave L20 millions towards the Supply Services." But Mr Bonar Law
anticipated a total peace Budget (if the war ended by March 31st next)
of L650 millions. This was probably too low, but we may at least hope
that Mr Hoare has gone rather further than was necessary to be on the
safe side.

In the other article on the subject of post-war debt contributed to
the last number of this Journal, an "Ex-M.P." plumped for a somewhat
novel variety of the Levy on Capital, in the shape of a Compulsory
Loan, bearing no interest and repayable in 100 years. Each individual
citizen to be made to subscribe to the extent of 20 per cent. of
his possessions. Ten per cent. of the amount due to be paid on
application, 10 per cent. six months after allotment, and 80 per cent.
on January 1st of the following year. When desired, the Government to
advance at 5 per cent. the money necessary for the payment subsequent
to allotment, full repayment of such advances to be made within
eight years. A Sinking Fund to be established to redeem the loan at
maturity. But is there any real advantage in this scheme over the Levy
on Capital, from which it only differs by the receipt by the payer of
a promise to repay in 100 years' time? The approximate value of
L1000 nominal of the Compulsory Loan stock would be, according to
"Ex-M.P.'s" calculation, in the year of issue L7 12s., money being
worth 5 per cent. and assuming that rate to be current during the
remainder of the term. The claim that there is no confiscation,
because "a perfectly good security is given for the money received,"
would seem rather futile to those who paid L1000 and received a
security, the present value of which might be below L10. They might
very likely think that outright confiscation (since confiscation
originally means nothing but "putting into the Treasury") is really a
simpler way of dealing with the problem. "Ex-M.P.," however, estimates
that the immediate redemption of L2800 millions of debt (which he,
rather modestly, expects to be the result of his 20 per cent. levy)
would enable the balance of the War Debt to be converted into 3-1/2
per cent. stock. This may be true, but if so it is equally true if a
similar or larger amount of debt is cancelled by means of an outright
Levy on Capital.

The merits and demerits of a Levy on Capital have already been dealt
with in the pages of this Journal "Ex-M.P.," however, brought forward
a slightly novel form of argument in its favour. He pointed out that
the money constituting the great increase in debt that has taken place
during the war will have been, in the main, contributed by people who
have worked at home under the protection of the Army and Navy, while
the soldiers and sailors have been prevented by the duty which sent
them out to risk their lives from subscribing a proportionate share to
the National Debt. Hence "a class that deserves most of the State will
find itself indebted to a class which--if it does not deserve least of
the State--has, at any rate, turned a national emergency to personal
profit." This is a strong argument, which, has been used frequently
in the course of the war in the pages of the _Economist_, against
borrowing for war purposes to the large extent to which our timid
rulers have adopted the policy. "To be really just," the writer
continued, "the process of taxation ... must be applied with greatest
force to those who have accumulated their money since the outbreak of
war, and only to a less degree to those whose fortunes have not been
built upon their country's necessity. The difficulty of separating
these two classes of wealth is great, and must, in the writer's
opinion, be effected by separate legislation--legislation which might
justly be based upon the increase in post-1913 incomes, a record of
which should now be in preparation at Somerset House." Everyone will
agree that everything possible should be done to take the burden of
the war debt off the shoulders of those who have fought for us; but it
is equally clear that now that the mischief of this huge debt has been
done, it will be exceedingly difficult to repair it by any ingenuities
of this kind. For instance, if the kind of taxation--in the shape of
a Compulsory Loan--proposed by "Ex-M.P." were enforced, how can we be
sure that it would not take a large slice off capital, the next heir
to which is a soldier or a sailor? Bad finance is so much easier to
perpetrate than to remedy that one is almost certain to come across
such objections as this to any scheme for making the war profiteers
"cough up" some of their gains.

Moreover, we have to remember that by no means the whole of the
war debt represents the gains of those who "have turned a national
emergency to personal profit." Some people whose incomes have been
actually decreased by the war, especially when currency depreciation
is taken into account, have, in response to the appeals of the
War Savings Committee, saved more than they ever saved before by
patriotically stinting themselves. And even the savers who have saved
out of war profits were so far more patriotic than the war profiteers
who did not save but squandered. In all the discussion concerning
the Levy on Capital I have not seen any answer (even in Mr Pethick
Lawrence's very persuasive little book in its favour) to the three
great objections to it (1) that it lets off the squanderer and
penalises the saver; (2) that the difficulty, trouble and expense
involved by the necessary valuation, and the iniquities and frauds
that are almost certain to arise out of it, will be enormous; and
(3) that its economic effect may be very serious in discouraging
accumulation. "Why should any one save," the unthrifty soul will most
naturally ask, "if his savings are liable to have a slice cut out of
them by a levy at any time?" The advocates of the Levy, and "Ex-M.P."
in his advocacy of a Compulsory Loan for repayment of debt; assume
that it can be done once and for all and never again. "Take one-fifth
of a man's savings away as an emergency measure not to be repeated,
and he will at once endeavour to save it back again." But how will you
persuade him that it is an emergency measure not to be repeated? How
can you be sure that it is so? I have heard a very distinguished
Socialist, discussing in private the beauties of the Levy on Capital,
point out that it is the sort of thing which, when once the ice has
been broken, can be done again so easily. From the Socialist point of
view the Levy on Capital is, of course, a simple means of getting, by
repetitions of it at regular intervals, all the means of production
into the hands of the State; but would the State make a good use of
them?

Another assumption about the Levy on Capital that seems to me to be
the merest will o' the wisp is the delusion that the whole saving that
it would entail by reducing the debt charge would necessarily and
certainly go to the relief of income tax. On this assumption Mr
Pethick Lawrence bases his most persuasive appeal to the smaller
income-tax payer, by showing that he would be better off after a Levy
on Capital than before it, thanks to the reduction in income tax,
which is assumed as axiomatically arising in its train. But is
this certain or even likely? Is it not much more probable that our
Government, finding its post-war Budget greatly lightened by a Levy on
Capital or a Compulsory Loan to redeem debt, will think itself free to
indulge in extravagance, maintaining a considerable part of the war
income tax and wasting it on rash experiments? All these weaknesses,
which appear to be inherent alike in the Levy on Capital or in the
scheme which gilds the pill by calling it a Compulsory Loan, seem to
be ignored or neglected (perhaps because they are unanswerable) by
their advocates. On the other hand, there are certain psychological
arguments on the other side. If the well-to-do, who would have to pay
the Levy or subscribe to the Compulsory Loan, would prefer that system
to a high income tax, there is no more to be said. A tax that is
popular with the payer, as compared with other modes of shearing
his fleece, needs no further recommendation. But, in view of the
probability of the experiment, once tried, being shortly and
frequently repeated, I Very much doubt whether this is so; as far as I
have been able by personal inquiry to test opinion on the point I have
found it almost unanimously adverse among those whom the Levy would
most seriously affect. If, as is much more likely, the imposition of
a Levy created better feeling among the working classes and the
returning soldiers and tended to more harmonious co-operation in
after-war tasks of reconstruction, it might be worth while to face its
evils and its dangers. But here again it is quite probable that if the
burden of war debt were clearly and palpably put on the shoulders best
able to bear it, that is, on those who are lifted by the gifts
of fortune--either in inherited money or unusual brainpower or
faculties--by an equitably graded income tax, the effect might be just
as good on the minds of those who suspect that the rich have battened
throughout the war on exploitation of the poor.

This much at least seems to be agreed by most reasonable people about
the debt charge--that it will have to be raised, either by a Levy on
Capital or by income tax or some other form of direct taxation, from
those who are blessed with a margin. We are not likely to repeat our
ancestors' mistake, after the Napoleonic War, of throwing the whole
burden on to the general consumer by indirect taxation of necessaries
and of articles of general consumption. Even Tariff "Reformers" say
little about the revenue that their fiscal schemes would bring in. And
with good reason. For in so far as they secured Protection they would
bring in no revenue; we cannot at once keep out foreign goods and tax
them; and any revenue that they brought in would be most expensively
raised, because a large part of the extra price paid by the consumer
would go not to the State but into the pockets of the home producer.
Nor is it likely that any of the many schemes--of which Mr Stilwell's
"Great Plan, How to Pay for the War," is a particularly bold
example--for paying off debt by a huge issue of inconvertible
currency, will achieve any practical result. Not only would they
defraud the debt-holder by paying him off in currency enormously
depreciated by the multiplication of it that would be involved; but
they would also, by that depreciation, throw the burden of the debt
on the shoulders of the general consumer through a further disastrous
rise in prices, and so would accentuate the bitterness and discontent
already rife owing to the war-time dearness and all the suspicions of
profiteering and exploitation that it has engendered.

After all, this problem of the war debt, in so far as it is held at
home, is not one that ought to terrify us if we look at it steadily.
People talk and write as if when the war is over the business of
paying for it will begin. That is not really so. The war has been paid
for as it went on, and, except in so far as it has been financed by
borrowing abroad, it has been paid for by us as a nation. Whatever we
have used for the war we have paid for as it went on, partly with
the help of loans from America and from other countries--Argentina,
Holland, Switzerland, etc.--that have lent us money. These loans
amount, as far as they can be traced from the official figures,
to about L1300 millions. Against them we can set our loans to our
Dominions, over L200 millions (a perfectly good asset), and our loans
to our Allies, perhaps L1500 millions, which the Chancellor proposes
to write down by 50 per cent., and might perhaps treat still more
drastically. To meet this foreign debt we shall have to turn out so
much stuff--goods and services of all kinds--for sale abroad to meet
the interest and repayment. We have further impoverished ourselves by
selling our foreign securities abroad No figure has been published
giving any clue to the amount of these sales, and we may perhaps guess
them at L1000 millions. If the pre-war estimates of our overseas
investments at L4000 millions were anywhere near the mark. It thus
appears that we shall end the war still a great creditor nation.

In so far as the debt was raised at home, the war was paid for by
those who bought the securities offered, and we have now to pay them
interest and set about repaying them the capital. This process
will not diminish the national wealth, but will only affect its
distribution. It will not diminish the amount of available capital,
but may even rather increase it by gathering into the hands of the
debt-holders--who are ex-hypothesi folk with an inclination for
saving--money that might, if left in the hands of those from whom it
is collected, have been squandered. The payment of the debt charge
merely means that those who came forward with their money when they
were asked to subscribe to war loans, have, according to the extent
of the effort that they then made, a set-off against the subsequent
taxation involved by the war debt. It would have been a much simpler
and more businesslike proceeding to have taken, instead of borrowing,
a much larger proportion of the war's cost during the war; but it is
too late now to rub in this platitude which is now pretty generally
admitted. Mr Hoare showed in last month's Journal that the creation
of the War Debt has caused a huge addition to what he has called
Rente--the gross income of the propertied classes; and there is much
logic in his contention that this income is the source from which the
debt charge should be met. At the same time both justice and economic
expediency seem to demand that his wider interpretation of Rente, to
make it include the earnings of those whose special qualifications
(or, we may add, special luck) put them in a position to earn more
easily than the struggling majority, should be applied to taxation
involved by the debt charge.

How, then, shall we deal with the debt? In the first place we want
a good Sinking Fund--1 per cent. at least--and all realisations of
assets in the shape of loans repaid, ships, etc., sold, should be
used for reduction of our foreign debt. For the home charge we want a
special form of income tax that will fall as lightly and indirectly
as possible on industry; that is, that it should be imposed on the
individual taxpayer direct. So that what we want is an extended,
reformed and better graduated form of the super-tax brought down so
low that every one who is not merely rich but comfortable should pay
his share, For example, any single man or woman with any excess over
L500 a year of unearned income, or over L800 a year of earned income
might well pay super-tax on that excess. The exemption limit might
well be raised by 50 per cent. for married couples (if their joint
incomes are still to be counted as one), and by L100 a year for each
child between the age of five and twenty-five. But all these figures
are mere suggestions, and the details of the scheme would have to be
worked out by Inland Revenue officials, whose experience and knowledge
of the practical working of such matters qualifies them for the task.
The broad principle is a special tax for the debt charge to be raised
direct from individual incomes with skilful differentiation, according
to the circumstances of the taxpayer, in the matter of the number
of his dependants, and also according to the source of the income,
whether it is being earned by exertions which illness might terminate
or received from invested funds, and therefore beyond the reach of the
"slings and arrows of outrageous fortune." That portion of the tax
that is required for Sinking Fund might be made payable, at the option
of the taxpayer, in Government securities at prices giving some
advantage to the holder. This form of special debt-charge super-tax
would enable the ordinary income tax to be reduced considerably at
once. Mr Edward Lees, secretary to the Manchester and County Bank, has
put forward a scheme by which taxpayers can buy in advance immunity
for so many years from so much annual income tax. If this suggestion
could be worked it might provide a means of quickening the debt's
repayment, though it looks rather like exchanging one form of debt for
another. But, in any case, it is urgent that the long promised reform
of income tax should be set in hand at once, so that it may be purged
of its present inequities and anomalies and set to work in peace to
redeem debt on a new and more scientific basis.